The Value Of Prices

Prices convey information within an Economy. Prices distill all the known, and unknown, factors affecting the availability of things we might choose to buy.

Generally, if Price goes up, we will tend to purchase less of an item, while if Price goes down, we’ll buy more. But why does Price go up or down?

Let’s look at an example. Last year, pig farmers suffered through an epidemic (of the pigs, not the farmers), which caused a significant percentage of the animals to be destroyed.

Since there were less animals coming to market, Prices for pork went up. Rising pork Prices, together with some public fear of eating tainted pork, caused many consumers to switch over to beef.

The increased demand for beef caused the Price for beef to go up. Some consumers responded by looking for alternatives to beef and cut back on their purchases somewhat.

You didn’t hear about the pig disease last year? Then you are like most people. But, it didn’t matter, since the change in the Prices told you all you needed to know, since the prices were based on the background information.

The Pricing Mechanism – part of Adam Smith’s “Invisible Hand” – assures that items in relative scarcity (like beef) are rationed automatically according to consumers’ Price preferences. And, if all of a sudden there is a glut of something – such as the continuous abundance of ever faster and more powerful personal computers – the automatic Price Mechanism helps a ton of those PCs get sold by keeping Prices as low as possible.

Price, and the profit available to suppliers at that Price, convey the information to the suppliers of what consumers want. If there is zero profit potential, then suppliers will look for something else to supply. If the profit, at the expected Price, is high, then suppliers of less profitable items will enter the field.

Prices, set automatically according to the sum total of individual consumers demands, allows the BEST assortment of goods and services to come to market.

This is part of the magic of the Free Market

• Prices tell consumers what the availability is of various items
• Prices, and the expected profit potential, based on consumer choice tell suppliers what to make available for consumers

Prices can move quickly or slowly.

Watch the Price action of “frozen orange juice concentrate” on the commodities markets. A threat of a frost can cause Prices to jump within days or even hours.

On the other extreme, Prices for automobiles, made from vast amounts of materials, equipment, and labor, tend to be much more stable. Some car “inputs” may rise while others fall, helping to offset each other. For example, the Price for a Toyota Camry has gone up only by about 1/3 since it was introduced in 1985 – less than 1% a year!

Prices also can move because of natural adjustments, or because of government meddling with the Economy.

As new and better equipment and methods are developed and adopted, Prices will tend to decline. As bad weather or labor strife hit, Prices will tend to rise for the items affected. All of these natural economic events help the Economy to adjust Prices – some up and some down, some a little and some a lot – so that a new BEST mix of consumer choices can be effected.

Almost all government actions have an effect on the Economy. Taxes, by inserting government alongside the 3 Natural Constituencies of any business (Consumers, Employees, and Owners), necessarily will cause Prices – throughout the Economy – to rise to varying degrees.

A subsidy, by transferring wealth from taxpayer to beneficiary of the subsidy (with a cut for providing the “service”) will raise the real Price for the subsidized item, while making that item’s apparent Price go down. Tesla, Prius, and Insight electric cars could not exist without the many thousands of Dollars subsidy per car.

Within Education, government/tax funded schools exist to such a large degree only because of the subsidies. Still, many students are home-schooled or attend various private and parochial schools, even though parents have to pay twice. “Free” still can’t erase the negative effects in schools where “Johnny can’t read” or “Johnny can’t add.”

Regulation also adds – artificially – to the Prices of most goods and services. By some accounts, government regulation adds about $1½ Trillion to the cost of producing goods and services in the US Economy.

The lunatic belief in man-made, catastrophic, global warming (CAGW) has empowered our government’s War on Energy. The cost of electricity nationwide is way up because of stupid governmental policies. In California, where the regulators are especially insane, many people are coming to their senses and are moving to Nevada and Arizona.

Our government’s (and the FED’s) suppression of interest rates – financial repression – is interfering with a vital Price in our Economy. It encourages speculation in the bubble laden stock market and, once again, in the housing market. The Zero Interest Rate Policy (ZIRP) allows our government to spend with wild abandon and encourages CEOs to borrow to buy back their own stock, helping to make their stock options value go up.

Stupid (evil?) interest rate policies throughout the world make the various world currencies become worth less and less (“Inflation”) as Prices throughout the world artificially are pushed up. This makes the consumers’ BEST choices not as good as they should be, because the Price information they use has been subverted.

The Dollar, which our government says we must use in commerce is down in value but up compared to uglier foreign currencies. Gold and Silver, which have been money for 5000 years or more, have had their Prices molested by a few huge banks, the actions of which many observers call illegal. Government regulators allow or even encourage this Price suppression to hide the debasement of the Dollar.

Price is an indispensable part for the Free Market system. With unfettered Price signals, consumer choices provide our Economy with the BEST mix of goods and services. Taxes & super-high Spending, Over-Regulation, Interest Rate Suppression, and other bad policies make all Americans poorer. Government actions which interfere with the healthy functioning of the Price Mechanism must stop.

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Action Item: Reduce the scope and actual activities, both in spending and regulation, to the bare minimum, in accordance with what the US Constitution permits for our Limited form of Government.